Insurance was one of the first financial products to achieve a level of sophistication recognizable to practitioners today. In the Late Middle Ages, insurance was widely traded in Italian port cities and life annuities were sold across Europe. However, insurance requires a calculation of risk that is rarely straightforward in a world where information and expertise is very fragmented. Further, as a financial product sold for profit, insurance had to survive criticism from medieval moral authorities. Still, insurance was allowed to thrive and support other commercial activities.
Italy and Insurance
In the Late Middle Ages, urban Italy possessed the most developed commercial culture in Europe. By its very nature, commercial life is fundamentally uncertain. Merchants are always dealing with risks and uncertainties about the future. Perhaps in no trade is this truer than in insurance, a product which merchants would regularly buy or sell despite possessing little formal knowledge of statistics or possessing much data. In Italy’s port cities, marine insurance was particularly common. While initially combined with loans, marine insurance became a standalone financial product in the 14th century and spread to northern Europe in the 16th century.
A large Italian city would see hundreds of marine insurance contracts made annually and the text of many of these contracts survived to this day. So too has some of the doctrinal debate among ecclesiastics, especially from Italy where insurance was particularly common. Jurists and theologians here were more likely to have counted merchants and financiers among their family or friends, perhaps swaying their opinions. Still, the question was not settled quickly and the judicial and theological debate on insurance grows in the 15th century.
In the 15th and 16th centuries, more and more was written and published on financial subjects. An example was Luca Pacioli’s 1494 work Summa de Arithmetica which summarized the arithmetic techniques of merchants. It included tables for calculating compound interest despite usury being subject to severe restriction. Specific to insurance, other handbooks from around this time included Pedro de Santarém’s On Insurance and Merchants’ Bets.
Insurance is based on the principle that risks can be priced and this requires a rational use of probabilistic reasoning. In the Late Middle Ages and Renaissance, this was generally not a quantitative process as good data was hard to come by. In practice, merchants trading in marine insurance based their analysis on a rough observation of accidents at sea along with factors such as distance, war, and the vessels and captains involved. Merchants would inform their associates often about dangerous conditions and this information was as useful in pricing insurance as it was in avoiding hazards to begin with.
“[Insurers] must recall that it is necessary to gather all the news that come from the sea and to pay special attention to them, to constantly ask for and inquire on pirates and evil people, wars, truces, reprisals and all the thing that may perturbe the sea. They must keep navigation maps on their desk and have a good knowledge of the seaports and the beaches, of the distance from one place to another, and they must take into account the condition of the captains, of the insured merchants, and of the vessels, and they must consider the merchandise, since all these elements are required” – Benedetto Cotrugli, the author of another 15th century handbook for merchants
Insurance rates varied according to the perceived risk, suggesting a reasonably well-thought-out underwriting process. For example, a typical late-14th century sail-driven vessel had to pay premiums of 3-4% for coverage on a voyage from Venice to the Balearic Islands whereas galleys, which were typically armed and could rely on both wind and oar driven propulsion, would pay just 1.5% for the same route. In rare cases, a shipmaster with a particularly bad reputation would also cause insurance to be withheld except at very high premiums. A route known for piracy would similarly be expensive to buy insurance for. Insurers would further control their risk by making widespread use of coinsurance or reinsurance or exempting certain perils from their policies.
Life annuities also became more common and more well-structured in this era. These annuities were payment obligations that continued so long as the annuitant lived and became common instruments across Europe. German cities regularly raised money by selling annuities. In the 14th century, these annuities were not always priced off a reasonable estimate of the remaining lifespan of the referenced life. Remarkably, many, if not most, simply offered the same pricing to all prospects. In 1350 though, the city of Nordhausen began offering life annuities to investors at rates that depended on the age of the annuitant.
The jurist Alexander Lombard knew that establishing a fair price for a life annuity meant considering probability. A limited common agreement of the probabilities involved ensured that the insurer was selling something with discernible and socially agreed upon value. In other words, an insurer could insure against a random event but there had to be some stability to this risk, the probability had to be at least theoretically calculable and withstand the test of common sense. Establishing a fair price was also important to confirming that no party was being abused in the transaction. The Franciscan friar John of Prato wrote in the mid-15th century that the premium must correspond with the risk borne. So, the development of a more sophisticated approach to measuring risk was critical for the social acceptance of insurance.
Some considered insurance to be a form of usurious lending because it was an attempt to profit off making one’s money available to others with no other effort to ‘earn’ the profit. Still, while potentially usurious when combined with other contracts in nefarious ways, insurance was generally cleared of accusations of usury because, as the jurist Lorenzo de Ridolfo pointed out it in 1403 “… something is given for something done. It is not given as a loan, since no loan is involved, but something is received for assuring the merchant of his goods, which are at risk by sea or land.” The transfer, for a fee, of a risk otherwise borne by an insured is accepted.
Domingo Soto, a 16th century Dominican priest, also failed to see a problem with insurance contracts as far as challenging the notion of divine will since insurance was not a denial of God’s power or foreknowledge but an acceptance of limited human knowledge. However, there was the question of whether insurance was a form of divination. Some saw in this an attempt to make God’s will predictable to man. Was trying to predict the future for profit an inappropriate use of humans’ mental faculties? An otherwise quite liberal 15th century theologian Conrad Summenhart thought so; he believed it illicit to profit from what is divinely determined.
This was the view shared earlier in the 15th century by João Sobrinho who took issue with insurers earning an underwriting profit from favorable conditions willed by God. He asserted that the insurers’ profit justly belonged to God not to them. By contrast, Pedro de Santarém noted that even the Pope cannot predict the future; there is a general uncertainty to life and so everyone must make bets on the future.
There was also a question of whether insurance offered an alternative security in society, one which could be more reliably employed, than that provided by God. The late 15th century theologian Peter Tartaret took a hard line against insurance on these grounds. He argued that the insurer was something of a fraud, offering for sale safety that can only truly be provided by God. However, isn’t what an insurer sells not safety per se but more like compensation? This was clearly valuable enough to create a market for insurance; if Peter Tartaret was right, no one would buy insurance. Later, Domingo Soto justified insurance by its frequent use; it was empirically a public good since it allowed for more business activity every day. This argument echoed an early-to-mid 15th century friar Bernardino of Siena. Clearly, insurance divided opinion but it had enough friends to be given space to develop.
Insurance was the product of a growing connectedness brought by trade across the sea. It was also the result of an increased professionalization of finance as commercial practices developed. The Late Middle Ages saw growing acceptance of commercial activity as a necessity and therefore an accompanying acceptance of insurance as a public good. These changes were monumentally consequential to life in Europe. In short, insurance was another product of a revolution, a fundamental change in outlook, that saw complex, volatile, but convincing solutions to problems prioritized over the simple and static, whether in religion or economics.
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Read about the ‘sea loan‘, an early form of marine insurance, and the ‘hull clubs‘, a form of mutual insurance. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
1. Ceccarell, Giovanni. “The Price for Risk-Taking: Marine Insurance and Probability Calculus in the Late Middle Ages.” Electronic Journal for History of Probability and Statistics, vol. 3, no. 1, June 2007.
2. Ceccarelli, Giovanni. “Risky Business: Theological and Canonical Thought on Insurance from the Thirteenth to the Seventeenth Century.” Journal of Medieval and Early Modern Studies, vol. 31, no. 3, 2001, pp. 607–658.
3. Franklin, James. “Quantifying Risk: Traditions and Practices in Medieval Western Christian World.” Prognostication in the Medieval World: A Handbook, edited by Matthias Heiduk et al., vol. 1, De Gruyter, 2021, pp. 698–710.